IMPACT OF THE NEW TAX LAW ON NONPROFIT HOSPITALS AND HEALTH SYSTEMS UBIT AND COMPENSATION

Transcription

1 IMPACT OF THE NEW TAX LAW ON NONPROFIT HOSPITALS AND HEALTH SYSTEMS UBIT AND COMPENSATION March 14, 2018 Catherine E. Livingston Amy Bibby, CPA

2 3-Part Series to Address Multiple Perspectives February 14: Overview March 14: UBIT and Compensation Siloing of trades and businesses Limitation on NOL carryovers UBIT on certain fringe benefit expenditures New excise tax on compensation over $1 million Taxation of employee relocation expenses and other changes April 11: Mergers, Acquisitions and Other Transactions 1

3 Unrelated Business Income Changes to Corporate Tax These provisions affect all corporations, for-profit and tax-exempt alike: Reduced Corporate tax rate to 21% for tax years beginning after 12/31/17 Example: a hospital with a 9/30 year end, new tax rate and other rules would be effective for 10/1/18-9/30/19 fiscal year Alternative Minimum Tax repealed for tax years beginning after 12/31/ % expense deduction allowed for tangible depreciable property placed in service between 9/27/2017 and 1/1/2023 Only if class life of 20 years or less Phased down through % limitation on NOLs created in tax years beginning after 12/31/2017 Indefinite carryforwards, but no longer a 2 year carryback Corporations disallowed deduction for certain fringe benefits (qualified transportation and parking) covered later Elimination of individual deduction and corporate exclusion for reimbursements of qualified moving expense 2

4 Separate Unrelated Trades or Businesses When Computing Unrelated Business Taxable Income - IRC 512(a)(6) Effective for tax years beginning after 12/31/2017 Exempt Organizations may no longer net the loss from one unrelated business/activity against the income from another. Effect is described as siloing because losses from one business may not offset gains from another. How distinctions among activities are determined not defined yet. IRS Priority Guidance Plan issued in February 7, 2018 lists this as an issue they intend to provide further guidance on before June 30,

5 Net Operating Losses IRC 172 NOLs are to be computed for each business and carried forward only to that business. NOLs arising in tax years beginning before January 1, 2018 may still be used to reduce aggregate unrelated business taxable income for years beginning on or after January 1, NOL carrybacks eliminated. NOL carryforwards allowed indefinitely. NOL deduction may reduce unrelated business taxable income no more than 80%. Interaction with IRC 512(a)(6) NOL applied separately for each trade or business. 4

6 UBTI How Separation of Business Lines Will Affect the Bottom Line Prior to tax years beginning on or after January 1, 2018: Parking Retail Pharmacy DME Sales Laundry Lab Tests Invest X: Real Estate Invest Y: Real Estate Invest Z: Health care Income 5,000 6,000 6,000 8,000 10, Expenses 6,000 7,000 4,000 4,000 6, Gain/Loss -1,000-1,000 2,000 4,000 4,000 10,000-10,000 10,000 UBTI = $18,000 5

7 UBTI How Separation of Business Lines Will Affect the Bottom Line For tax years beginning on or after January 1, If activities have to be very fragmented (i.e. no combining of similar activities permitted) Investments treated as separate lines of business regardless of underlying activity Separate retail, non-patient business lines Parking Retail Pharmacy DME Sales Laundry Lab Tests Invest X: Real Estate Invest Y: Real Estate Invest Z: Health care Income 5,000 6,000 6,000 8,000 10, Expenses 6,000 7,000 4,000 4,000 6, Gain/Loss -1,000-1,000 2,000 4,000 4,000 10,000-10,000 10,000 UBTI 2,000 4,000 4,000 10,000 10,000 UBTI = $30,000 6

8 How Separation of Business Lines Will Affect the Bottom Line For tax years beginning on or after January 1, What if activities can be combined based on our investments, services provided to non-patients, retail activities Parking Retail Pharmacy DME Sales Laundry Lab Tests Invest X: Real Estate Invest Y: Real Estate Invest Z: Health care Income 5,000 6,000 6,000 8,000 10, Expenses 6,000 7,000 4,000 4,000 6, Gain/Loss -1,000-1,000 2,000 4,000 4,000 10,000-10,000 10,000 UBTI 2,000 4,000 4,000 10,000 10,000 UBTI = $30,000 7

9 How Separation of Business Lines Will Affect the Bottom Line Many theoretical examples provided here, and Priority Guidance is anticipated to clarify some or all of these issues. Parking Retail Sales (Pharm/DME) Non-patient Services (Laundry/Lab) Invest X, Y and Z: Income 5,000 12,000 18,000 - Expenses 6,000 11,000 10,000 - Gain/Loss -1,000 1,000 8,000 10,000 UBTI 1,000 8,000 10,000 UBTI = $19,000 8

10 NOLs: Changes to Corporate and Tax Exempt NOL Provisions Prior to tax years beginning on or after January 1, 2018: Parking Retail Pharmacy DME Sales Laundr y Lab Tests Invest X: Real Estate Invest Y: Real Estate Invest Z: Health care Income 5,000 6,000 6,000 8,000 10, Expenses 6,000 7,000 4,000 4,000 6, Gain/Loss -1,000-1,000 2,000 4,000 4,000 10,00 0 UBTI before NOL 18,000 NOL available (18,000) UBTI ,000 10,000 Prior NOL $50,000 Using 18,000 32,000 available for next year 9

11 Limitation on NOL NOLs created after tax years 12/31/2017 can only be used offset future income from that same activity NOLs created before tax years 12/31/2017 can be used to offset the total UBTI NOLs can only offset 80% of UBTI Tracking of old and new NOLs Parking Retail Sales (Pharm/DM E) Non-patient Services (Laundry/La b) Invest X, Y and Z: Income 5,000 12,000 18,000 - Expenses 6,000 11,000 10,000 - Gain/Loss -1,000 1,000 8,000 10,000 UBTI 1,000 8,000 10,000 UBTI 19,000 NOL available 15,200 UBTI 3,800 Prior NOL $50,000 Using 15,200 34,800 available for next year against all UBI. Must hold 1,000 loss from parking separately for future parking income. 10

12 Unrelated Business Income Tax Applied to Amounts Spent on Certain Employee Fringe Benefits IRC 512(a)(7) Payments by an exempt organization included in UBTI if not deductible for taxable organization AND payment is for qualified transportation fringe benefits transit passes, transportation in commuter buses or vans, qualified parking, bicycle commuting reimbursement for any parking facility used in connection with qualified parking (i.e., parking on or near the employer s business premises or near location for boarding vans, buses or carpools). Payments for on-premises athletic facilities NOT subject to UBIT Payments for entertainment expenses NOT subject to UBIT Elected benefits under qualified transportation fringe plans --??? 11

13 Excise Tax of 21% on Compensation Over $1M and Excess Parachute Payments IRC 4960 Which organizations must pay the tax? 501(c)(3), 501(c)(4) or otherwise exempt under 501(a) Yes Government hospital that has a section 501(c)(3) determination letter? Public university that does not have a section 501(c)(3) determination letter? Organizations liable for 21% excise tax on portion of remuneration over $1M paid to any covered employee. Five highest compensated employees for current year; and Anyone who was a covered employee for any tax year beginning after December 31,

14 Once a Covered Employee, Always a Covered Employee Employee W-2 Pay Excise Tax W-2 Pay Excise Tax for 2018 for 2019 A $2M $210,000 $ 1.2M $42,000 B $1.8M $168,000 $ 2M $210,000 C $1.5M $105,000 $1.8M $168,000 D $1.4M $84,000 $1.5M $105,000 E $1.3M $63,000 $1.5M $105,000 F $1.2M N/A $1.3M $63,000 13

15 Excise Tax on Compensation, Continued Remuneration includes all wages and amounts required to be included in gross income under IRC 457(f) (which are included at time of vesting). Designated Roth contributions are excluded. Excess parachute payments are excluded because they are separately subject to the excise tax. Remuneration does NOT include payments to a licensed professional for medical or veterinary services. Note that remuneration is a different term than compensation. Covered employees include 5 highest compensated employees, which tracks requirement for reporting on Form 990. Form 990 reporting is based on reportable compensation, which is the greater of amounts reported in Box 1 or Box 5 of W

16 Relevance of 990 Reporting of Compensation Cash Pay Signing Bonus SERP Severance Retention 15

17 Open Questions and Immediate Concerns - Compensation for Taxable Year Text of IRC 4960(a) There is hereby imposed a tax equal to the product of the rate of tax under section 11 and the sum of (1) so much of the remuneration paid (other than any excess parachute payment) by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1M, plus (2) any excess parachute payment paid by such an organization to any covered employee. In determining compensation paid for the taxable year, does organization use the calendar year compensation reported on the W-2 and Form 990, or, if taxable year is different, must it allocate compensation to the taxable year? 16

18 Reconciling Calendar Year and Taxable Year for Compensation

19 Mitigate Tax Liability By Change in Vesting Schedule W-2 Pay Cash 800, , , , ,000 SERP Vesting $1M Pay Subject to Excise Tax $900,000 W-2 Pay Cash 800, , , , ,000 SERP Vesting $250, , , ,000 Pay Subject to Excise Tax 75,000 $100,000 $125,000 $150,000 Tax on $900,000 vs. Tax on $450,000 18

20 Open Questions and Immediate Concerns Change Employers Text of IRC 4960(c)(2) For purposes of this section, the term covered employee means any employee (including any former employee) of an applicable tax-exempt organization if the employee (A) is one of the 5 highest compensated employees of the organization for the taxable year, or (B) was a covered employee of the organization for any predecessor for any preceding taxable year beginning after December 31, If a covered employee moves from one organization to a related organization, will covered employee status carry over? 19

21 Switch Employers Within a Group Avoid Tax? Parent Hospital Subsidiary 20

22 Switch Employers Within a Group Avoid Tax? Parent Hospital Subsidiary 21

23 Open Questions and Immediate Concerns Medical Services Text of IRC 4960(c)(3)(B) The term remuneration shall not include the portion of any remuneration paid to a licensed medical professional (including a veterinarian) which is for the performance of medical or veterinary services by such professional. What are medical services? If an employee provides both medical and other services, must compensation be allocated? For example, CEO is an MD. CEO sees patients in clinic two mornings per month. No explicit provision covering this activity in CEO s contract. 22

24 Elimination of Tax-Favored Treatment for Relocation Expenses Eliminates deduction for moving expenses for tax years beginning after December 31, 2017 through (IRC 217) Eliminates exclusion from income where employer pays or reimburses moving expenses for employees commencing employment or who have been employed and have principal place of work moved at least 50 miles farther from principal residence. Effective for tax years beginning after December 31, 2017 through (IRC 132(g)) Tail coverage for prior job remains a taxable benefit. Not affected by changes in new tax law. Hospital response? pay and gross up the new employee. Be alert to implications for excise tax on compensation over $1M. 23

25 Employee Achievement Awards Restricted - IRC 274(j)(3) Award is not deductible if provided in form of cash, gift cards, securities, vacations, theater or sports tickets, meals, or other non-tangible personal property. If award expense is deductible, award remains non-taxable to employee under IRC 74(c). If award expense exceeds $400 amount that is deductible for employer, the excess is included in the employee s income. Effective for tax years beginning after December 31,

26 When are Employee Awards Taxable? Taxable Not Taxable 25

27 Questions? Catherine E. Livingston Amy Bibby, CPA The information in this presentation is based upon the internal revenue code and other relevant legal authority as of a specific point in time. These authorities are subject to change or modification retroactively and/or prospectively and such changes may affect the validity or correctness of this information. Additionally, the information contained within the presentation may be tailored to a specific audience and therefore may not be applicable to all taxpayers or all situations. This presentation does not constitute tax advice by DHG. 26

28 Part Three: April 11, 2018 Mergers, Acquisitions and Other Transactions Registration Coming Soon Catherine E. Livingston Amy Bibby, CPA The information in this presentation is based upon the internal revenue code and other relevant legal authority as of a specific point in time. These authorities are subject to change or modification retroactively and/or prospectively and such changes may affect the validity or correctness of this information. Additionally, the information contained within the presentation may be tailored to a specific audience and therefore may not be applicable to all taxpayers or all situations. This presentation does not constitute tax advice by DHG. 27

29 Any presentation by a Jones Day lawyer or employee should not be considered or construed as legal advice on any individual matter or circumstance. The contents of this document are intended for general information purposes only and may not be quoted or referred to in any other presentation, publication or proceeding without the prior written consent of Jones Day, which may be given or withheld at Jones Day's discretion. The distribution of this presentation or its content is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of Jones Day.

30 [end of part 1]

31 Wage Withholding IRS Notice 1036 includes new withholding tables. Employers should be using them as of February 28, Tables still rely on number of withholding allowances. IRS revised worksheet employees use to compute number of requested withholding allowances. However, updated Publication 505 still not yet available to help determine other credits. Employees will have to check for themselves to see whether the amount of withholding is correct for their circumstances. IRS withholding calculator now available. 30

32 New IRS Withholding Calculator 31

33 New W-4 32

34 New W-4 -- Worksheet 33